NGP Capital invests in growth-stage companies, with an initial check size of $10 millionRead more...
IA Capital Group focuses on fintech and insurtech startups
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Andy Lerner is Managing Partner at IA Capital Group.
Lerner has been employed by IA Capital Group since 1995. He is responsible for the day-to-day activities of IA Capital, and is a member of its investment committee. In 2000, he launched IA Capital's venture capital business which is now the firm’s core activity. Lerner was also President and Managing Director of Guggenheim Securities, LLC, IA Capital's former broker-dealer business, until 2003.
He is a Director of Homeowners of America, SMArtX, Credibility Capital, Crown Global Insurance Group, Credit Sesame, Wellthie, Boost, SmartAsset, and Gainfully. Lerner has over 25 years of experience in the financial services industry. Prior to joining IA Capital, he served as an investment banker in the Financial Institutions Group of Smith Barney Inc. for four years and in its Mortgage and Asset Finance Group for two years.
Lerner holds a B.S.E. in Electrical Engineering and Computer Science from Princeton University and an M.B.A. in Finance from The Wharton School, University of Pennsylvania. He serves as a trustee of the Newark School of the Arts and as a director of Transportation Alternatives.
VatorNews: What is your investment philosophy or methodology?
Andy Lerner: The first thing you should know is IA stands for Inter-Atlantic. so IA and Inter-Atlantic are the same. We’ve been around as a firm for quite a long time, we’re based in midtown Manhattan and we specialized in venture capital broadly in fintech for many years, and then in the last five or six years in insurtech. We’re a small firm overall, about $350 million in size, but within insurance technology, for an independent firm, I think we’re the largest, and we’re certainly the best known and most experienced, firm. So, within this small niche, which is even a lot smaller than all of fintech, we’re among the highest profile firms with people that really know insurtech. That’s the very basics of who we are.
Our largest limited partner is a very large insurance company, one of the largest in the world, and we’ve been very close to them for a number of years. The reason our firm doesn’t have a higher profile is, for several years, we were just investing for one LP, and we weren’t out fundraising, we weren’t out talking to the broader community. We’re a completely independent firm but that one LP was 100 percent of our capital until around 10 years ago. For the last few years, we’ve replicated our model of strategic venture capital for that one insurance company and now we do it for 13 insurance companies and we also have several non-insurance companies limited partners as well. So, we have a much broader investor base than we did in the past.
VN: What was behind the switch from fintech to insurtech? What was the opportunity that you saw there?
AL: We’ve been very well known in the payments area in fintech. We invested in three early stage payments companies in the early days of our firm that went public, and our first fund is number one ranked in its category on Pitchbook in terms of returns, so we really did great in the payments area. We continue to invest in that but we saw an opportunity in insurtech before it was even called insurtech. After we were doing payments for about seven or eight years, the banks had already heavily invested in the area and were catching up to the fintech companies, but we didn’t see that in insurance. We saw that the insurance companies have really lagged behind modern technology for decades now and we thought, ‘Well, this is a great opportunity to invest in disruptive companies that can take away market share from insurance companies, but then, at the same time, insurance companies are going to have invest more.’ So, we just saw a great market opportunity and also it made more sense for us from our limited partner standpoint, for us to be able to give strategic insights on what’s happening in the insurance technology area is very important to our insurance limited partners
VN: What verticals inside insurtech do you invest in?
AL: The biggest area is property and casualty, which is homeowners insurance, auto insurance, workers compensation, all personal and business lines of insurance. That’s about 70 percent of all the activity we see in insurtech. We are diversified in that sector; we have companies that are focused on distribution, we have companies focused on innovative products, we have service providers across value chain, so better underwriting technologies, distribution technologies, AI, machine learning. So, we’re focused across that area.
The other 30 percent of insurtech is life insurance technology, annuities, health insurance, some more esoteric lines of insurance, and we don’t see enough startups in that area, so we’ve been really trying to do an outreach and encourage prospective entrepreneurs to focus on life and health insurtech startups.
My personal belief is a young entrepreneur, at a pretty early age, will buy auto insurance or renters insurance and probably have a poor experience and then want to disrupt this sector. If you look at some of the products that life insurers sell, like annuities or retirement products, somebody in their 20 or 30s might not have any exposure to those products in their daily life, so I think it’s attracting fewer entrepreneurs and hence less investment opportunities for us to choose from.
VN: It would seem then that the entrepreneurs who would be focusing on those areas would then be older and more experienced.
AL: Obviously there are older entrepreneurs doing P&C and there’s younger ones doing life insurtech but, as a general rule, that’s correct. I think there are not enough young people focused on their retirement or disability or some of these other safety net products that are more applicable to people that are older.
VN: What's the big macro trend you're betting on?
AL: We don’t invest in any cyclical trends, that’s not what we focus on. Obviously, interest rates and anything financially related is important but it’s cyclical and we’re not trying to predict interest rates, we’re not trying to predict whether there’s going to be another earthquake or catastrophe in the insurance area, and if prices will harden.
We look for long term trends. In fintech we’ve bet on a long term trend that electronic payments would become more prevalent, and cash and checks would become less popular, and that’s been a great thesis for us since we started 19 years ago. In insurance technology, the big long term trend is companies and people are not buying insurance from the local agent they met at the country club or the rotary club, they’re buying increasingly from online channels. The relationship aspect is still very important in a lot of areas of insurance but each year it’s becoming less important, and each year the companies with digital distribution are getting more and more market share. So, that’s a long term trend that we’re going to bet on since the youngest generation today, they don't even want to talk to a person when they make financial services purchases, they just want to do it online.
VN: What is the size of your current fund and how many investments do you typically make in a year?
AL: We’ve been around awhile so we’re on our sixth, seventh and eighth vehicles. Those are the ones we’re currently investing from, and they added up to $150 million. We just finished a fund raise in March and we got $150 million of new capital and we’re putting that to work. Our first fund is completely exited, and then our other four funds are fully invested in different stages of being exited, and they’re an additional $200 million so that’s $350 million total.
We have two very large investors and they get their own funds, and then everybody else goes into our typical, general, multi-LP fund, so it’s technically three vehicles, but it’s $150 million that we’re currently investing.
We’ve made six investments this year, and maybe we’ll do maybe two more, so six to eight per year is a good number number for us. That’s for new investments, plus follow on in our portfolio companies.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
AL: $5 million on average is a typical investment size for us. We really don’t do seed investing; Series A and B, sometimes Series C, is our sweet spot.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
AL: We like at least $2 million in revenue. There’s not a hard and fast rule that we have but if a company’s pre-revenue, even if they’ve done a seed and they’re on an A round, it won’t meet our criteria. So, we like companies that have meaningful enough revenue where we can look at trends, growth rates; if they’re a B2B company then we can talk to the largest customers and really get a feel for it. Our whole due diligence is set up to extrapolate from a company that’s high growing and we try to get a good insight into where they’re going to be in the next few years. We’re really not set up to invest in companies pre-revenue.
Then, on the high side, we like companies that are $100 million pre-money valuation or less. So, for a $5 million investor, we want to get at least five percent ownership, and that would be the most valuable company we invest in. Typically, companies we invest in are in the $20 or $40 million valuation range, so we can be a meaningful investor. Because we have so much sector expertise, we like to lead the rounds and really like to help the companies as much as we can. We think we’re, within fintech and insurtech, very well suited to be the lead investor that does the due diligence, that negotiates the terms, serves on the board and can really be extremely helpful to the company within our vertical. So, we’re set up to lead rounds and that really shies us away from some of these companies that have multi-$100 million valuations, where we would only get a very small percentage and not be able to lead. That’s really not a good fit.
VN: What other signals do you look for? Team, product, macro market?
AL: The first screen, when a company comes to us, is to find out, is this with our industry? Is the size appropriate? Is the amount they’re raising appropriate? Once those quantitative parameters are met, then I think team is the most important qualitative parameter, but that takes a little while to assess. We get a one page summary, and sometimes it’s very hard to assess the quality of the team until you meet them. But, as you move through the diligence process, team is absolutely important.
We try to see everything in our space, so uniqueness is a very important quality to us. If we see a company that’s selling auto insurance online, and they’re buying Google AdWords, and they’re not really distinguishing themselves, we might literally see 30 companies that have that same strategy, and that’s just not going to be interesting for us. But if you there’s a company that a unique product or a unique technology, and it’s something we haven’t seen before, that really sets them apart.
VN: What do you think about valuations these days? How does that affect your investing strategy?
AL: They are going up and they’re high. That’s true in payments, as well as insurance technology. I think it’s a good time to be an entrepreneur and I think venture capitalists have to be very selective; we walk away from some very good companies just because we don't see eye to eye on valuation. I think the best known companies get very high valuations and then the company that’s number two or three in the space doesn’t get nearly as high valuation, but they could be higher quality companies. So, we look for those opportunities.
We invest across the U.S. and Canada, sometimes companies outside of Silicon Valley or New York are more reasonably priced than others. So, we are in a market where we really do have to pick and choose our spots and, unfortunately, walk away from good companies. And it’s questionable if valuations are going to be sustainable; I think this WeWork situation is scaring away very late stage private investors who did a round at WeWork and now the value is a quarter or so, or less, of where they went. The same thing in the public markets, like Uber’s last private round is much higher than the stock price today. So, I think that it’s possible that some of these private valuations cool off a little bit.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
AL: We’re sector experts so we try to set ourselves apart in that we have the most experience, that we know our area better than anybody else. So, if you are interested in exposure in insurtech and related fintech sectors, we think that we would be the number one, most logical choice. We’re really the only firm with a long term track in insurtech and we’re very proud of our track record over many, many years. We’re a 19 year old firm and we’ve beat the S&P 500 by over six points per year over 19 years, which is very hard to do, so we’re proud of that. There are other firms that have similar strategies to us, but they tend to be brand new firms, with no exits, and really not much to talk about in terms of track record, so we think we compare very favorably to them. We went from one insurance company LP to 13 in the last few years, and we’ve had some good momentum fundraising.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
AL: The mediocre companies will take money from anybody, but the high quality startups really can pick and choose who their partners are. I’ve worked very hard on setting this firm up to be the most attractive alternative for high quality entrepreneurs.
Entrepreneurs like working with independent firms because they can move quickly and they really are focused on returns. Independent firms are looked at as the highest quality investors to get. On the other hand, taking money from a strategic company, like an insurance company, in the space has advantages as well: the insurance company can be a potential partner, they can bring other insurance companies in as potential customers, and they have big balance sheets. So, there’s a lot of advantages of working with an independent firm, there’s a lot of advantages to working with a strategic, like an insurance company. We've pitched ourselves as the best of both worlds; we’re a completely independent firm, myself and my two partners make all the decisions, and we can move very fast but, at the same time, our limited partners are large insurance companies and we can bring all the benefits that they bear to the table as well. We make connections all the time with our LPs that can be potential customers and door openers in the industry, so our main pitch is that you don’t have to choose between an independent or a strategic, you can get both with IA Capital.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
AL: I’m particularly proud of this company called Netspend. They were the original prepaid card. So, there’s credit cards and debit cards, but then there are cards that you load money onto, and that’s a prepaid card. They were really a groundbreaking company in that sector. It was founded by two immigrant brothers from Mexico, the Sosa brothers, and it was a venture capital investment that a lot of people wouldn’t have made - to back two immigrants with no experience in the sector, about 20 and 22 years old, and we took a chance on them. It was a $12 million pre-money valuation, and we became the largest owner of Netspend. Fast forward about eight years, the company did a very successful IPO and then it got bought by a larger payments company for $1.4 billion, so more than 100 times our original pre-money valuation. We sold some shares on the way, so we didn’t get that full 100x return, but it was still a fantastic investment for us, and we’re very proud of that company. It really changed the industry; now really anybody at any income level can buy something on the internet because they go to their local 7-11, get a prepaid Visa or Mastercard, and then use that card to buy something online, but that wasn't the care before Netspend was around.
A more current investment is this company that used to be called TicketGuardian and now it’s Protecht. So, just like you buy an airline ticket and at checkout it asks if you want insurance in case you’re sick or you have to work and you can’t make flight, Protecht does the same thing for events like concerts, sporting events, participation events like a marathon or a triathlon. At checkout you buy the coverage, and a concert ticket could be $150 like an airline ticket, and it's a similar type of coverage. This company is growing extremely fast; we got in on the Series A last year and co-led, and it’s just exceeding all our forecasts. It’s a private company and still has room to run and to grow, but they’ve become the leader in ensuring these live events. It’s exciting to see an early stage company take over and be a dominant player where they compete against some of the largest insurance companies in the world. That’s really a star in our current portfolio.
I wish I could mention all of our companies. We’ve very proud of our portfolio, and we have a lot fewer write-offs than a typical firm so we expect the large majority of our companies to have positive outcomes.
VN: What are some lessons you learned?
AL: We try to be good people and good partners within our space. Like any venture capital firm, we only invest in one out of 100 companies we see, so 99 percent of the time we’re saying, ‘no.’ I think, over the years, we’ve done our best to say ‘no’ in the most constructive and politest manner. There are companies that we know we’re not going to invest in but we really try to go out of our way to help them. I think we’ve developed a good reputation as being good players, good sports. I kind of get a little offended when people think of venture capital like they’re sharks like on Shark Tank or something; that’s really not the way we approach the business.
VN: What excites you the most about your position as VC?
AL: There’s a lot of autonomy, a lot of trust, in being a general partner of a fund. Our investors have given us full discretion to make investments that we believe make the most sense, and it’s a lot of responsibility but it’s something I enjoy as well. Instead of being told to make investment in XYZ company, that’s our decision and we take it very seriously. That’s the most enjoyable part of the entire business, getting to pick and choose your spots based on your own particular investment philosophy or preferences.
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
AL: Our big insurance company investor, we don't disclose their name, but it’s really not a big secret in the industry. I’m sure if you talk to somebody else that knows you’d find out in a heartbeat who it is.
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